Bankruptcy is a right dating back to the writing of the US constitution, where the founding fathers of the country provided the ability for people to be able to relieve themselves of debts that they can simply never hope to pay off in their lifetime. Unfortunately like many of the rights provided for in the constitution of the United States the right to declaring personal bankruptcy is open to abuse and manipulation. Now in the aftermath of the recent financial crisis more and more debt-crippled people are assuming that they can simply declare personal bankruptcy, no matter what kind of debt they owe, and just walk away and start all over again.
One of the most common assumptions that people make is that both student loan or tax debt can be nullified by declaring personal bankruptcy, but let\’s take a closer look at each of these debts in turn to see if this is true.
Tax Debt
Without wanting to ruin your day the reality is that the vast majority of tax debts cannot be eliminated by filing for either Chapter 7 or Chapter 13 bankruptcy. The only exception to being able to write off your tax debts through filing for Chapter 7 is that the taxes owed must be income taxes only, you did not commit any form of tax evasion or fraud, the tax return is dated at least 3 years before you filed for bankruptcy, you filed a tax return on this debt at least 2 years before filing for Chapter 7 and your tax debt must be evaluated by the IRS themselves at least 240 days before you file. You must meet all of these requirements to be even considered for a tax debt write-off.
Student Loans
The total \”value\” of student loan debt in the United States is roughly US$1 trillion, with the average student owing approximately $25,000 in student loans each. In some cases a single student can be responsible for more than $100,000 of student loan debt, so no doubt you\’re wondering if it\’s possible to simply declare yourself bankrupt and relieve yourself of that debt?
But can you actually use bankruptcy to erase your student loan debt?
The short answer to this is \”Yes\”, but there are some very specific conditions which you must meet in order that you can qualify. Firstly you need to be able to demonstrate that your student loan debt is causing you undue hardship, which basically means that you can\’t afford even the most Spartan of lifestyles while paying off your loans. Secondly you need to clearly show that living in this impoverished state is likely to continue for the entire term of your student loan(s). Finally you must also show that you\’ve actually attempted to repay your student loans in the first place e.g. you didn\’t simply quit a well paid job to sneakily renege on your debts.
We would recommend that you always consult with a lawyer who specializes in bankruptcy when making decisions that could have a serious impact on your life and your future financial standing, while also never assuming that filing for bankruptcy is the answer to all of your financial woes.